University holds investments in offshore tax havens, leaked documents show

U of T’s endowment and pension funds have been found to hold investments in two offshore tax havens located in the Cayman Islands and Malta.

These revelations come out of the second-largest document leak in history by file size: the Paradise Papers. Leaked documents from the offshore law firm Appleby and business registries in 19 tax jurisdictions were first reported on November 5 by the International Consortium of Investigative Journalists. Using these documents, the Toronto Star reported last Wednesday that U of T invests money in companies in the Cayman Islands and in Malta — two jurisdictions in which taxes are very low. While U of T is not breaking any laws by way of these investments, it does raise ethical questions for a university that lists “fiscal responsibility and accountability” among its four principled commitments to the university community.

The investments

The Paradise Papers show that U of T’s pension fund is a shareholder in WLR IV Loans AIV Feeder (Cayman), Ltd., and they name the Governing Council specifically as an investor in a Maltese-listed company. Neither investment is named in the university’s annual financial statements.

The University of Toronto Asset Management Corporation (UTAM) manages all of U of T’s $2.6 billion endowment and $4.4 billion pension funds, and it is responsible for the decisions to invest offshore. This responsibility does not come lightly: the head of UTAM is ranked among the top paid public provincial employees, and historically earns much more than U of T’s president.

William Moriarty, the former head of UTAM, made $1,045,582.62 in 2016 despite having retired four months into the year.

“The university is aware of how UTAM makes investments on behalf of U of T,” said Althea Blackburn-Evans, Director of Media Relations at U of T. “Our diversification strategy would be much like any large institutional investor… we have a fiduciary duty to protect and grow the investments we make on behalf of our staff and faculty whose pensions we manage, and to make the most of the donations we receive, for the ultimate benefit of our students.”

UTAM made the investment in the Cayman Islands 10 years ago and calls it “a very small position,” according to reporting in the Toronto Star.

The taxes

Nothing about the offshore investments, which the university may be profiting off of, is against Canadian tax law.

“U of T is a tax exempt institution. It does not pay tax on its investment income, regardless of whether those assets are located in Canada, or other countries including tax havens,” said Michael Smart, a tax expert and professor in U of T’s Department of Economics. “There is nothing illegal about having investments in tax havens.”

“If there’s no tax advantage, why do they do it?” asked Smart — and he has an answer. According to the professor, many investment funds and private equity firms are now located in tax havens because their managers receive tax advantages there.

“They are probably also there because some of those funds’ clients prefer the secrecy of tax havens and they may not be fully reporting their income to tax authorities in their home countries, where tax may be due on their offshore investments,” said Smart.

Ethics and optics

Len Brooks, a professor of business ethics and accounting in UTM’s Department of Management, said that because the investments are completely legal, the issue of investing in tax havens is mostly about optics.

“There are some who would argue that if you earn money in a state, then you should be leaving some tax to be paid in that state,” said Brooks. “And if the company was not doing that, then some of the supporters of the university might find it unattractive, and some of those may find it sufficiently unattractive to withdraw their support for the university.”

Brooks said that, when it comes to whether or not it’s right that a publicly funded institution has investments in offshore tax havens, it depends on what the company is doing with the money that’s invested.

WLR IV Loans AIV Feeder (Cayman), Ltd., one of the university’s holdings, was founded by the United States Secretary of Commerce Wilbur Ross, who has a net worth of hundreds of millions. It is part of a network of many offshore companies related to the Secretary of Commerce. Another company of Ross’, WL Ross & Co., reimbursed investors to the tune of $10.4 million USD and paid a $2.3 million USD fine to the US Securities and Exchange Commission last year. The fine was paid for overcharging investors on management fees.

One of the major findings of the Paradise Papers leak is that Ross has ties to some of Russian President Vladimir Putin’s affiliates through WL Ross & Co. The company is the largest shareholder in Navigator Holdings Ltd, a gas shipping business. One of Navigator’s largest clients is the Russian company Sibur. Gennady Timchenko, a friend of Putin, and Putin’s son-in-law, Kirill Shamalov, are among the owners of Sibur.

Smart said that, more broadly, “Tax havens are a big problem in the world today.” He said that “many Canadian corporations have subsidiaries in tax havens,” and some have been accused of using the havens to shift profits out of Canada to “avoid tax in inappropriate ways.”

But, if as Smart said, offshore tax havens are simply where the money is, then it’s important to note what exactly the income on the investments is used for.

According to Blackburn-Evans, the income is used for “student aid, endowed chairs, research and teaching, and new academic programs, in support of more than 85,000 students.” She specified that 43 per cent of the income from the $2.6 billion endowment goes toward student aid.

Smart said that, in his opinion, there is nothing unethical about this for U of T.

UTAM became a signatory to the United Nations-backed Principles for Responsible Investing in December 2016. The corporation was also instructed in the March 2016 “Beyond Divestment” report from President Meric Gertler to apply environmental, social, and governance factors into its investments and to increase transparency. It released its first-ever report on responsible investing over the summer.

In the summer, UTAM’s President and Chief Investment Officer Daren Smith spoke to The Varsity about the report and the corporation’s commitment to ethical investing and transparency.

“We have a lot to learn here, and I’m not going to pretend like we’ve figured it all out,” said Smith. “There may be some bumps in the road, and there may be some on the advocacy side that we need to learn from, but so far I think we’ve been quite successful and we haven’t had any hiccups.”

Brooks said that the policies of the university related to its investments “need to be reviewed on an ongoing basis,” and that “the application of those policies need to be reported on by the investment advisors.”

“It’s not as black and white as many people think when they originally consider it,” said Brooks. “But there are fundamental issues that the university needs to reflect upon and conceivably build into its policies.”

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U of T forecasts net income of $138.2 million, $70.1 million deficit

The University of Toronto’s financial results and report on debt reveal that U of T forecasts a net income of $138.2 million and projects net assets to be at $4.35 billion. The forecasted net income is a decrease from last year’s net income of $287.8 million, while the value of last year’s net assets was $4.38 billion.

The forecast, which includes the university’s projected revenue, expenses, net income, and changes in net assets for the fiscal year ending on April 30, 2016, was presented on January 25 to the Governing Council Business Board. The board oversees the university’s financial transactions.

These forecasts are based on a projected investment return of 0.4 per cent, an endowment payout of $78.3 million, an increase of $96.4 million in reserves, and an increase of $23.7 million for future divisional capital expenditures. The university acknowledges that it only has interim information regarding divisionally controlled revenue and expenses, and that investment returns are uncertain.

The university also projects a deficit of $70.1 million, which is a drop from the $89.5 million deficit run during the 2015 fiscal year. This has been partially attributed to the $22.9 million increase in tuition fee revenue, correlated with an increase in enrolment from international undergraduate students, who currently pay over five times more than domestic students.

The debt report

This report is comprised of three parts: the annual debt strategy review, the status report on debt, and the credit report by Moody’s Investors Service.

According to the status report on debt, the university allocated $1.218 billion in borrowing room, with $150 million allocated to pensions and $200 million allocated to other internal debt. The university also allocated $868 million for external components, which includes $15 million for the expansion and renovation of the Recreation Wing at UTSC.

External debt makes up $717.6 million, the bulk of which is in the form of unsecured bonds issued by the university.

The university’s credit rating is unchanged from last year; Moody’s gave the university an Aa2 rating, while Standard & Poor’s and Dominion Bond Service assigned a rating of AA. These ratings are considered investment grade.

Currently, U of T’s debt policy limit is set at a debt burden ratio of five per cent. This means that the debt and interest should not exceed five per cent of total expenditures. This is only the university’s acceptable limit; the recommended upper limit is set at seven per cent.

According to the annual debt strategy review, the university’s debt policy limit was set to $1.401 billion as of April 2015, and the university expects this to increase by an additional $350 million to $1.75 billion by April 2021.

The review also states that a one per cent increase in the interest rate would result in the reduction of the limit between $53 million and $88 million, while a two per cent increase would see a reduction between $95 million and $158 million.